MANILA, PHILIPPINES - The Asian Development Bank (ADB) will provide $300 million to help Bangladesh smooth volatility in its financial markets, making them safer and more attractive places to invest.
"Improved operational and financial efficiency of the securities regulator, better regulation, and other reforms should put an end to the booms and busts so financial markets in Bangladesh can support long-term economic growth and facilitate private investment," said Syed Ali-Mumtaz H. Shah, Senior Financial Sector Specialist with ADB's South Asia Department.
Bangladesh's stock market has see-sawed dramatically in recent years, with the Dhaka Stock Exchange index now at almost half the value it had in December 2010, amounting to a reduction of 22% of the country's gross domestic product (GDP) and wiping out the savings of thousands of individual investors. Bangladesh's bond market, meanwhile, is rather small at 5% of GDP, meaning funds aren't being channeled into critical infrastructure investment.
Bangladesh is looking to boost its domestic economy, targeting an 8% annual growth rate by the 2015 fiscal year and a 10% annual growth rate by the 2021 fiscal year. To reach middle income status and reduce poverty, it will need to address the structural deficiencies in its capital markets to better support the real economy and build much-needed infrastructure.
ADB's loan will be used to help the securities regulator, the Securities and Exchange Commission, do a better job of independently overseeing activities, and to set up specialized tribunals to deal with financial cases. Both moves are aimed at increasing long-term investor confidence.
The loan will also be used to help the government shift to a system of selling bonds at market based rates, which will help set a realistic pricing yardstick for corporate borrowers and encourage more issuance. Meanwhile, formulation of a long-term capital markets plan ensures that this program loan is an integral part of a government-owned long-term development strategy.
Crucial issues such as pursuing demutualization of the stock exchanges and eliminating taxes on initial public offerings of shares and bond transactions are addressed through the loan. Looking further down the road, the loan will also work to strengthen the insurance sector - typically a key player in capital markets - and finalize a plan to manage the government's debt portfolio.
The funding marks the second ADB loan to support development of Bangladesh's capital markets. In November 1997, ADB provided the equivalent of $80 million to improve the transparency and efficiency of the capital markets in the wake of a 1996 stock market crash caused by excessive speculation and alleged widespread irregular market activities.